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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

In a few cases, such as CitiFinancial, subprime lending firms were part of a bank
holding company, but most—including Household, Beneficial Finance, The Money
Store, and Champion Mortgage—were independent consumer finance companies.
Without access to deposits, they generally funded themselves with short-term lines
of credit, or “warehouse lines,” from commercial or investment banks. In many
cases, the finance companies did not keep the mortgages. Some sold the loans to the
same banks extending the warehouse lines. The banks would securitize and sell the
loans to investors or keep them on their balance sheets. In other cases, the finance
company itself packaged and sold the loans—often partnering with the banks ex-
tending the warehouse lines. Meanwhile, the S&Ls that originated subprime loans
generally financed their own mortgage operations and kept the loans on their bal-
ance sheets.

MORTGAGE SECURITIZATION: “THIS STUFF IS
SO COMPLICATED HOW IS ANYBODY GOING TO KNOW?”
Debt outstanding in U.S. credit markets tripled during the s, reaching . tril-
lion in ;  was securitized mortgages and GSE debt. Later, mortgage securities
made up  of the debt markets, overtaking government Treasuries as the single
largest component—a position they maintained through the financial crisis. 
In the s mortgage companies, banks, and Wall Street securities firms began
securitizing mortgages (see figure .). And more of them were subprime. Salomon
Brothers, Merrill Lynch, and other Wall Street firms started packaging and selling
“non-agency” mortgages—that is, loans that did not conform to Fannie’s and Fred-
die’s standards. Selling these required investors to adjust expectations. With securiti-
zations handled by Fannie and Freddie, the question was not “will you get the money
back” but “when,” former Salomon Brothers trader and CEO of PentAlpha Jim Calla-
han told the FCIC. With these new non-agency securities, investors had to worry

about getting paid back, and that created an opportunity for S&P and Moody’s. As
Lewis Ranieri, a pioneer in the market, told the Commission, when he presented the
concept of non-agency securitization to policy makers, they asked, “‘This stuff is so
complicated how is anybody going to know? How are the buyers going to buy?’”
Ranieri said, “One of the solutions was, it had to have a rating. And that put the rat-
ing services in the business.” 
Non-agency securitizations were only a few years old when they received a pow-
erful stimulus from an unlikely source: the federal government. The savings and
loan crisis had left Uncle Sam with  billion in loans and real estate from failed
thrifts and banks. Congress established the Resolution Trust Corporation (RTC) in
 to offload mortgages and real estate, and sometimes the failed thrifts them-
selves, now owned by the government. While the RTC was able to sell . billion of
these mortgages to Fannie and Freddie, most did not meet the GSEs’ standards.
Some were what might be called subprime today, but others had outright documen-
tation errors or servicing problems, not unlike the low-documentation loans that
later became popular. 